SBP increases bps by half to 10.75%
State Bank of Pakistan (SBP) has increased policy rate by 50 Basic Point System (bps) to 10.75 percent, effective from April 1, 2019 for another two months.
Taking into account developments and evolving macroeconomic situation, Monetary Policy Committee (MPC) noted that sustainable growth and overall macroeconomic stability requires further policy measures.
It included, underlying inflationary pressures continue, fiscal deficit is elevated and despite an improvement, current account deficit is still high. In this backdrop and after detailed deliberations, MPC decided to increase the policy rate by 50 bps to 10.75 percent.
Nonetheless, despite narrowing, current account deficit remains high, fiscal consolidation remained slower than anticipated and core inflation continued to rise, Governor SBP, Tariq Bajwa said.
These pressures on headline inflation are explained by adjustments in administered prices of electricity and gas, significant increase in perishable food prices and continued unfolding impact of exchange rate depreciation.
Core inflation maintained its 13-month upward trajectory accelerating to 8.8 percent in February 2019 from 5.2 percent a year earlier. Further, rising input costs on back of higher energy prices and lagged impact of exchange rate depreciation are likely to maintain upward pressure on inflation despite a moderation in aggregate demand due to a proactive monetary management.
The latest available estimates of major crops also depict a lackluster performance by agriculture sector. The slowdown in commodity producing sectors has downside implications for growth in services sector as well.
In this backdrop, real Gross Domestic Products (GDP) growth is projected to be around 3.5 percent in FY19. Owing to stabilisation measures, current account deficit narrowed to $8.8 billion in Jul-Feb FY19 compared to a deficit of $11.4 billion during same period last year-a fall of 22.6 percent.
This includes a notable pace of retrenchment of current account deficit by 59.9 percent during first two months of 2019 over same period last year.
With an improvement in external balance as well as an increase in bilateral official inflows, SBP’s foreign exchange reserves gradually recovered to $10.7 billion on March 25, 2019. While reserves are still below standard adequacy levels (equal to three months of imports cover), recent improvement on external front has nevertheless improved business confidence.
In absolute terms, government borrowed Rs3.3 trillion from SBP and retired Rs2.2 trillion of its borrowing from scheduled banks (on cash basis) during July 1 to March 15, FY19.
This in turn, facilitated banks to meet private sector credit demand that increased by 9.2 percent without putting pressures on market interest rates.
Much of increase in credit demand was for working capital due to higher input prices and capacity expansions in power and construction allied industries.
Average headline CPI inflation reached 6.5 percent in Jul-Feb FY19 compared to 3.8 percent recorded in same period last year.
Meanwhile, YoY CPI inflation has risen considerably to 7.2 percent in January 2019 and further to 8.2 percent in February 2019, highest YoY increase in inflation since June 2014, he said.